Cement mixer trucks sit parked on the quay side at a Lafarge SA depot. Photographer: Fabrice Dimier/Bloomberg

ACC, Ambuja Cements Signal Stress, Slowdown In Annual Reports

Two of India's largest cement companies expect growth in the industry to slow in 2019.

ACC Ltd. and Ambuja Cements Ltd.—which are subsidiaries of Europe’s largest maker of construction material LafargeHolcim—said in their annual reports that the Indian cement industry’s growth, which was 9 percent in 2018, would fall to 7-8 percent this year.

That's expected to have a bearing on the companies, which are weighed by rising costs of crude oil and raw materials, stressed balance sheets and potential negative cash flows due to ongoing expansion and cement being taxed at 28 percent GST.

However, the companies said the government’s initiatives in housing and infrastructure sectors would propel demand this year. ACC and Ambuja Cements also expect the benefits of a master supply agreement—under which the companies will supply cement to each other at a discount, among other conditions—to be realised this year.

Here’s What ACC And Ambuja Cements Think About 2019

Demand Drivers

The government’s focus on railways and ports will benefit the cement industry, according to Ambuja Cements. ACC expects growth to come from central and east India—where it’s adding capacity.

Challenges: Expansion, Rising Cost

ACC flagged ongoing capacity expansion—which has led to an imbalance in total installed capacity against capacity utilisation—as material risk for the cement industry.

ACC announced the ramping up of its capacity by 5.9 million tonnes in central and east India at an outlay of Rs 3,000 crore, while Ambuja Cements is setting up a greenfield integrated plant with a capacity of 3.1 MT for clinker and 1.8 MT for cement grinding at Rajasthan, with capital expenditure of Rs 2,350 crore.

Master Supply Agreement

The boards of both the companies explored the possibility of a merger in May 2017 but abandoned it nine months later and came up with a master supply agreement to:

  • Maximise synergy.
  • Achieve economies of scale.
  • Reduce operational costs.
  • Unlock value without an actual merger.

The companies plan to optimise the cost to service markets by using each other’s plant capacities and maximise utilisation of assets to generate additional sales for each company apart from utilising spare inventory.

CLSA said in a note that the companies can realise the benefits of the agreement this year.

Fall In Operating Cash Flows

The companies’ operating cash flows declined to five-year lows in 2018. While ACC’s cash flow fell 28 percent, that of Ambuja Cements’ dropped by 68 percent. Their operating cash flows stand at Rs 1,118 crore and Rs 596 crore, respectively.

Stretched Working Capital

Higher working capital requirements along with tax payments weighed on operational cash flows. Working capital requirements rose due to an increase in trade receivables and inventory, which was driven higher by increased prices of pet coke and imported coal. The companies attributed the increase in trade receivables to increase in sales.

Inventory costs rose in October 2017 when the Supreme Court banned pet coke temporarily in Rajasthan, Haryana and Uttar Pradesh to curb pollution. That led to an increase in fuel costs as the companies had to depend on imported coal, which was 20-30 percent more expensive.

A considerable increase in trade receivables and inventory resulted in a higher turnover ratio and sales days outstanding for the companies.

ACC’s average inventory turnover and days of sales outstanding increased from 37 days in 2017 to 39 days in 2018 due to increase in cement and coal inventory. Its average trade receivables in sales days outstanding for cement sales as of Dec. 31, 2018 increased to 13 days from 11 days a year ago, while that for its ready-mix concrete business rose to 80 days from 77 days. Ambuja Cements reported an inventory turnover of 0.87 days and days of sales outstanding of 29 days.

While the companies’ expansion could be met through internal accruals, their free cash flows could turn potentially negative. They didn’t declare interim dividend in the year ended March 2018 to conserve resources for upcoming expansion and other capital expenditure projects.